Caution reigns as traders await Mr Draghi 

The euro is steady, benchmark bond yields nudging lower and bourses are mixed as investors wait to see if the European Central Bank will introduce a package of measures designed to tackle deflation concerns and boost the bloc’s economy.

Industrial commodity prices are muddled following disappointing data from China, and the dollar index is 80.62, holding near three-month highs ahead of the latest update on the US jobs market.

The FTSE All-World equity index is less than half a per cent below its record touched in 2007, after the S&P 500 closed overnight in virgin territory. Futures suggest the Wall Street barometer will ease 2 points to 1,927 at Thursday’s open.
The FTSE Eurofirst 300 is starting the session up fractionally, just shy of its best levels in six years after its Asia-Pacific peer added 0.1 per cent.

Equity benchmarks have been underpinned during the recent stages of the multiyear bull run partly by investors’ conviction that, though the global economic environment is improving, the major central banks appear reluctant to exit the post-financial crisis era of unorthodox and ultra-accommodative monetary policy.

Indeed, the expectation currently is that the ECB on Thursday will deliver an additional stimulatory jolt.
“Strictly speaking, D-Day took place on June 6. But for financial markets, D-Day may well come early if the ECB delivers what is expected when it announces its decision at 12:45 London time,” said forex analysts at Citi.
Another cut in the central bank’s main interest rate is widely forecast, alongside a move to negative rates on its “deposit facility” – in effect a charge for parking overnight funds. ECB president Mario Draghi may also announce he will tweak liquidity providing operations to encourage bank lending to small businesses.

Mr Draghi last month alluded he would take action in June, and investors appear already to have priced some of this into the market. The euro, near $1.40 four weeks ago, is up 11 pips on the day at $1.3609.
Traders are scrambling to hedge potential forex volatility. The implied volatility on one-day options on the euro versus dollar exchange rate, which at the end of last week was 4.3 per cent, has jumped to 22 per cent, the highest in more than a year, according to Bloomberg data.

The yield on 10-year Bunds is down 1 basis point to 1.43 per cent, just a dozen or so basis points above the 12-month low touched in mid-May.
Equivalent maturity US Treasuries are off 2bp to 2.59 per cent as the market also awaits Friday’s non-farm payrolls report – a crucial data point in determining the trajectory of Federal Reserve policy.
On Wednesday, private payrolls processor ADP said that 179,000 jobs were created in the US last month, fewer than expected and down from a revised 215,000 increase in April. The Fed has described US growth as “moderate” to “modest”, suggesting little appetite for a tightening of policy anytime soon.

Earlier in Asia there were mixed fortunes for greater China bourses, with Hong Kong’s Hang Seng off 0.3 per cent and the Shanghai Composite up 0.4 per cent.
The mainland shrugged off HSBC’s monthly purchasing managers’ index for China’s services sector, which produced a reading of 50.7 in May, marking one of the slowest months in the eight-year history of the survey of private sector, non-manufacturing companies. May’s figure was lower than April’s 51.4, but still above the reading of 50 dividing growth from contraction.
“Growth momentum remains slow and private sector sentiment is weak,” said Qu Hongbin, HSBC economist.

Japan’s Nikkei 225 rose 0.1 per cent, welcoming the yen’s overnight slide to five-week lows around Y102.80 to the dollar. The Japanese unit has since firmed a bit, however, perhaps reflecting broader market caution, and is 22 pips firmer at Y102.51.

Such reticence and the China data are contributing to a mixed showing for industrial commodities. Copper is up 0.2 per cent and Brent is slipping 15 cents to $108.25 a barrel.
(Additional reporting by Patrick McGee in Hong Kong)

 

Source: FT

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